Owing back taxes can put you in a precarious financial situation. When you’re in debt to the IRS, the federal government can put a lien on your bank account, garnish your wages, and more. Worse, the amount you owe increases over time since you are responsible for the interest on your back taxes.
While COVID-19 has made managing finances even more difficult for many people, the economic crisis caused by the pandemic does have a silver lining. Thanks to the federal government’s response, now is a better time than ever before to get a handle on your back taxes. Even if you can’t repay your tax debt in full, you may be able to use this year to reduce the amount you owe and set yourself up for a debt-free future.
So, how can you take care of back taxes during the COVID-19 pandemic? Let’s look at a couple of different options you have for working with the IRS.
1. Use Your Stimulus Check
One of the first things the US government did in response to COVID-19 was to send a $1,200 check to everyone in the country, making less than $75,000 per year. Even if you owe back taxes, you should have received a check.
That money came with no strings attached, enabling you to use it for whatever you wanted. If you owe back taxes, it is recommended to send the money right back to the government.
Of course, the benefit is that you instantly reduce your tax bill by $1,200 without dipping into your savings. Better yet, by paying down such a substantial amount all at once, you can significantly cut down your future interest payments.
2. Take Advantage of Extensions
The COVID-19 era is an excellent time to pay off your back taxes because most deadlines for filing your 2019 tax return were pushed back by three months. That’s three months during which you’re not gathering more tax debt or struggling to keep up with interest payments.
Saving three months on interest payments could give you a headstart on tackling your tax bill. Any money you would have paid in interest can go towards paying down your principal debt instead. That means less debt and reduced interest charges in the future.
3. Ask for an Installment Agreement
Installment agreements are payment plans with the IRS that allow you to pay off your back taxes over months or years instead of all at once. While the IRS has always been amenable to installment agreements, the tax agency has been incredibly lenient with granting payment plans this year. That’s because the IRS knows that many people around the country are struggling to make ends meet.
This type of agreement can help you meet your day-to-day expenses while also slowly working through your tax debt. The downside, though, is that you will still accrue interest on your principal debt. In addition, there’s a fee if you don’t complete your installment payments within 120 days of the agreement date. In 2020, since tax deadlines were pushed back to July, you have until mid-November to pay off your 2019 tax debt without paying extra fees.
4. Make an Offer in Compromise
With an offer in compromise, you can essentially negotiate down your back taxes with the IRS. For example, if you owe $10,000 in back taxes, you could propose an offer in compromise that brings your bill down to $6,000. The IRS will simply forgive the rest.
Typically, the IRS isn’t keen to accept offers in compromise. But during the pandemic, the agency has made it clear that offers are welcome. It won’t accept low-ball offers—the IRS still has a lot of leverage over people who owe back taxes—but you might be able to cut your tax bill by 25% to 50%.
The key to getting an offer in compromise accepted is to prove that paying your back taxes constitutes an undue financial burden or that you genuinely don’t have the money to pay your tax bill. During the COVID-19 pandemic, when unemployment is extremely high, you’ll have a stronger case before the IRS if you’ve recently lost your job or had to shut down your business.
5. Need Help? Turn to tax relief companies
Navigating the IRS bureaucracy on your own can be incredibly tricky, especially if you want to apply for an installment agreement or ask for an offer in compromise. Thankfully, several tax agencies can represent you in front of the IRS and offer creative solutions for dealing with your back taxes.
For example, companies like Community Tax, The Tax Resolvers, and Anthem Tax Services specialize in helping clients work with the IRS. These companies can negotiate with the IRS to remove a lien on your bank account, set up an installment agreement, ask for extensions, or propose an offer in compromise. Importantly, these tax agencies can also help you with your future tax filings in order to reduce the amount you owe and lessen the risk of being audited by the IRS.
A chance to get rid of your tax debt
Owing back taxes can put you in a bad place financially and leave you at the whims of the IRS. While COVID-19 has caused financial hardship for many people, the pandemic has also offered a chance to pay off your tax bill. For example, you can chip away at your back taxes by using your government stimulus check or taking advantage of payment extensions.
Plus, the IRS is more forgiving because of the economic crisis created by the pandemic. So, you may be able to reduce your tax bill by asking for an offer in compromise. If you need help, turn to a tax agency that can negotiate with the IRS on your behalf.